Microsoft at the crossroads

As the first phase of a lengthy litigation comes to a close, the question of whether Microsoft is an illegal monopoly looms over the company's ongoing business practices and its overall role in the emerging electronic-business economy.

In last week's ruling, US District Judge Thomas Penfield Jackson said the software giant has an operating system monopoly. But a lengthy appeals process means it likely will be years before the dispute between Microsoft and the US Department of Justice (DoJ) is resolved.

Jackson said Microsoft will "use its prodigious market power and immense profits to harm any firm that insists on pursuing alternatives" to its products.

Jackson's findings of fact in the federal government's antitrust case obviously will affect the future of the software giant and the way it does business.

But rapid changes in the marketplace have already affected the company, which, for example, is dabbling in application hosting. Since the suit was filed, the competitive landscape has changed, with non-PC devices and Internet services proliferating. PC vendors are now shipping Linux systems, and America Online has purchased Netscape.

In the meantime, Microsoft continues to pursue business as usual by buying smaller companies and has made scant alterations to its software, licenses, and strategies.

"Microsoft has consistently followed its typically aggressive business behavior," said Hillard Sterling, an antitrust lawyer at Gordon & Glicksen, in Chicago. "Microsoft firmly believes there aren't anti-competitive effects [to its business practices], notwithstanding its hardball tactics."

Since the launch of the DoJ suit, the relationship between enabling technologies, such as Microsoft Windows and its emerging e-business model has become highly intertwined. This means that a broad swath of companies outside the computer industry are anxiously watching developments in this case.

However, many observers said the ever-shifting high-tech marketplace is bringing Microsoft around to realise that Windows won't always dominate every arena.

"Microsoft wants to make Windows the best platform for those things [electronic commerce], but it is getting harder and harder to argue that it can leverage a monopoly in that new territory," said Warren Wilson, an analyst at Summit Strategies.

Microsoft has been sticking to its strategy of building around its Windows OS - the core of the Do's case, which accused the company of illegally "tying" its Internet Explorer browser to the OS. Using Windows in conjunction with technologies such as XML, Microsoft is making a major foray into the e-commerce world.

"BizTalk is XML-based, and while it is aimed at boosting the Microsoft platform and BackOffice, at its core XML is platform-independent, and Microsoft certainly realises that," Wilson said.

A case in point is Microsoft's Passport online wallet, which lets shoppers browse online retailers who support it. Passport began as a service tied to the Microsoft Network. But whereas in the past Microsoft officials might have been tempted to tie Passport partners' hands with exclusivity agreements, the government's lawsuit has sapped the company of that kind of intimidating clout, one analyst said.

"In the near term, this is not going to have much impact on Microsoft's behavior. The biggest change is what other companies do with Microsoft," said Rob Enderle, a vice president at Giga Information Group.

"There's always been a belief that Microsoft would respond punitively if you did something they didn't like. You were afraid of Microsoft's reaction," Enderle said. "That belief has been pretty much destroyed."

When the two sides squared off for closing arguments on Sept. 21, government lawyers reiterated their position that Microsoft is a monopoly with an "unshakable stranglehold" on the market for PC OS software. Microsoft lawyers said the suit was meritless.

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